Alcatel-Lucent Divests Security While Everyone Else Is Buying Rapidly

Alcatel-Lucent reportedly wants to sell its cybersecurity operations. This raises some serious questions, with competitor Cisco  investing in the space and FireEye and Palo Alto Networks on the rise.

Alcatel closing in on its next deal
In late 2012, Alcatel-Lucent received $2.1 billion in financing to undergo a restructuring effort it called Shift. The company pledged to divest $1.37 billion of assets by 2015, and it has already announced deals to sell nearly $550 million of its business.

The company also discontinued the operation of its enterprise unit in the first quarter -- a billion dollar business that's being sold to China Huaxin for $365 million. Therefore, Alcatel-Lucent is getting close to reaching its goal.

In looking at Alcatel-Lucent's business, investors would assume optics, managed services, or perhaps some assets in wireless would be for sale. Instead, The Wall Street Journal is reporting that Alcatel-Lucent is in advanced talks to sell its cybersecurity assets to the French company Thales.

Alcatel's cybersecurity segment is integrated into its other businesses, having only 75 employees and three locations. It is not a segment with reported revenue. Still, with Alcatel's large patent portfolio, investors have to believe that intellectual property and security infrastructure -- and not necessarily revenue -- are playing a role in Thales' interest.

Alcatel goes in a different direction
Nonetheless, Alcatel-Lucent's decision to sell its cybersecurity segment is a bit of a head scratcher. This is a segment that is growing in importance -- one where many of its peers are thriving.

Last year, Cisco acquired Sourcefire for $2.7 billion, a company with fast growth that had annual revenue of $223 million. Cisco has used this acquired technology in its email and web security gateways, two of the more vulnerable segments of its business that also apply to Alcatel-Lucent. Cisco also acquired a smaller malware-protection company last week, ThreatGRID, to enhance the capabilities of Sourcefire.

By all measures, Cisco appears to view cybersecurity technology as an important piece of its business, likely realizing the need and growing threat of crimes in this area. Other significant players in this space include Palo Alto Networks and FireEye, both of which have made major investments as of late.

Palo Alto thrives in next-generation firewalls and cloud-based security, but has also made endpoint security acquisitions, which prevent risks from remote devices like Cyvera earlier this year for $200 million. Palo Alto also acquired threat-detection start-up Morta Security in January.

FireEye, which sells appliances to prevent advanced persistent threats, has also made high-profile endpoint security acquisitions like Mandiant earlier this year for about $1 billion. Combined, Palo Alto and FireEye are two cybersecurity specialists that are growing fast. Palo Alto and FireEye trade at 11 and 22 times sales, respectively, and are nowhere near profitable, showing the premiums investors are willing to pay for this space alone, and the excitement that exists.

Final thoughts
Essentially, Alcatel-Lucent, a large well-diversified company, is selling cybersecurity while everyone else is buying. Wall Street has shown with Palo Alto and FireEye that it believes cybersecurity to be a disruptive industry for the future. Cisco's investments confirm this belief -- yet Alcatel-Lucent seems somewhat oblivious.

With that said, Alcatel-Lucent's core growth segments like LTE, broadband, and core routing are all areas where cyber threats roam, especially in endpoint, where such acquisitions have occurred. At some point, Alcatel-Lucent will have to get serious about security, including next-generation technology. It will have to make investments in order to compete against the likes of Cisco.

Alcatel-Lucent looks to be behind the curve with this knowledge. The sale of this small segment, and the fact that it's not a larger business, signals what may become a long-term problem for the company.

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Brian Nichols owns shares of Alcatel-Lucent (ADR). The Motley Fool recommends Cisco Systems and Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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